Flipping Houses for Profit

I’ve mentioned before in a book review that I was, at one point, very interested in flipping houses for profit. What do I mean by flipping houses? It means to purchase houses that need cosmetic (or more) work selling for well under market value, upgrade them, and sell them for profit (hopefully) in a relatively short period of time. Sounds pretty easy in theory, but flippers can get way over their head if they don’t know what they are doing.

From reading a few books on flipping, watching various flipping TV shows and speaking with local investors, it seems that one critical step is running the numbers as accurately as possible before purchasing the property to ensure that the project is financially viable. The profit on a flipping endeavor is made when you buy which perhaps makes it the most important step. That is, the lower the purchase price of the house itself, the higher your potential profit margin.

The Process

Evaluate the House – Once you find a prospective home that needs a bit of work, find out the market value of the home when it is in top notch, fixed up, condition. A real estate agent, or internet search should help here.

Repairs – Get a contractor to give you an estimate of the repair/materials cost and the approximate time line. Give yourself a fudge factor in this calculation as projects have a tendency to go over budget.

Calculate other Expenses – Obtain the cost of selling (real estate agent commissions, legal fees) and calculate your holding fees (purchasing legal fees, financing costs, utilities). Figuring out the agent/legal fees should be easy enough, but financing can be a different story. As a real estate flipper, you want to buy and sell as fast as possible. Some lenders have a problem with lending money for such a short period of time, which is why the flipper may have to resort to private financing. Private financing/mortgages generally have higher interest rates, but may be worth it to complete the project.

Add in desired profit – Like any business a profit margin needs to be included. From reading books and speaking with local flippers, the profit should always be built into the offer/purchase price.

An Example:

The author explains that the key to flipping properties for profit is that you need to include your profits into your expenses when deciding on your maximum purchase price. For example:

Market Value when fixed: $200k

repair materials/labor cost: -$20k

holding costs: -$5k

agent selling fee: -$10k

closing costs: -$1k

profit: -$20k

fudge factor: -$5k

Maximum purchase price: $139k

Seems like a large spread between $200k and $139k, but note that houses that are worth $200k in mint condition are typically listed for much less when they need extensive repairs.

There you have it, my big picture thoughts on the process of flipping a house for profit. Of course, my only experience in real estate investing is with rental real estate (and REITs), but the above is what I’ve come up with based on reading various books and speaking with local real estate flippers.

Personally, I don’t have the guts to do a flip (right now) as it requires a fair bit of risk and a lot of time (that I don’t really have).

Have you ever taken on a house flipping project? Any tips?

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About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

a) Your judgement in identifying undervalued fixer-uppers (including estimating cost of repairs)
b) Your judgement in deciding what renos will be most valued by purchasers
c) Your expertise in executing or managing the reno and sales process (e.g. being your own general contractor and/or real estate agent)
d) Your sweat equity
e) Living in a construction zone (if this becomes your primary residence)
f) Your ability to invest capital in the house (including funding surprises and delays)
g) General market appreciation

The problem is that when the market was going gang-busters, a lot of people could be successful flippers based on a lot of g), and a little bit of a), d), and f). In particular, you could be a mediocre flipper and do OK. g) provided the buffer – if you were unlucky, you’d make less of a profit and it would take longer, but you would stay whole.

Now g) is gone (in some areas) or very risky (e.g. in Ottawa/Mtl housing prices are doing fine, but who knows for how long). Therefore, you really need to be able to say why you’ll be good at all of a) through f) to make money.

Emotional separation is key when flipping a house, remember its business. Don’t spend extra money on a lavish kitchen if simply replacing the cabinet drawer’s and countertops will do. You need to appeal to the larger market and not your individual taste which are usually more expensive.
Cost reduction has a direct impact on your bottom line (sweat equity). I do most of the work myself and subcontract specialized work to the pros when I have to. I can’t understand people who try and flip houses by hiring contractors to do all the work with little or no construction experience.
My tip – do as much of the work as you can yourself. If you don’t know how to do it, find a contractor who is willing to sell his experience. Hiring a contractor to provide advice and not actual work can be well worth it when it comes to stuff outside your comfort zone.

1. Don’t do it unless you will thoroughly enjoy working on the project…. it has to be fun because from my experience, the sweat equity can be gruelling at times.

2. Get your real estate license and cut your expenses. If you study after work and take the exams in your spare time you could potentially save thousands of dollars on fees when you buy and sell your flipper home and eventually your primary residence.

If there are any real estate agents out there, I would love to hear your comments regarding how practical this would be……

The other option to flipping houses is to live in the house as you are trying to renovate it. Then if it takes a year to do, you can still live in it. If you can make $20,000+ each time you sell your house you are doing wonders for your bottome line.

It will be significant work though and I am interested in any response to “Go Leafs Go” (about the real estate license).

I did all the training to get my real estate license but did not apply for a license. In Ontario there are courses that you must pass from OREA (Ontario Real Estate College) then join as a salesperson with a firm for at least 2years before becoming a broker. Typically the real estate fees are 6% paid by the seller of which 25% goes to each side’s broker/salesperson. So as a salesperson you typically get 1.5% gross.

What interested me in getting the full broker’s license is getting both the broker and salesperson’s share 3% total. With brokerage license in Ontario you also get a mortgage broker’s license with it. Mortgage broker fees are as high as 1% of the mortgage price.

So in the end if you have the licenses you can net 4% back on the property you want to buy, which is the bulk of the required 5% downpayment. Couple that with first line access to MLS as well as pricing histories. (Of course there are fees associated with the licenses and memberships that I haven’t discussed, and the courses from OREA are not cheap)

I heard that the tax system in Canada makes it difficult to be profitable when flipping a home that wasn’t your permanent residence. If it is not your permanent residence you would have to pay Capital Gains tax on any profit wouldn’t you? Not sure to what extent that would effect your bottom line….also not sure how the US tax system works.

I love how ‘watching shows on TV’ is considered part of your research ;)

From friends and family who have done this, it always seems that people tend to be both greedy and lazy. They always seem to overestimate how much the property will be worth after repairs (i.e. they want more money back!), and always underestimate both the time and cost required for the work.

Seems like a sexy business to get into, I’ve thought about it from time to time, but I realize if I did such a venture, my ‘fudge factor’ would probably have to be some 20-25% of my cost – much more than the 12% you’ve got listed FT.

We have ‘flipped’ 5 properties in Manitoba over the past few years as side projects…it is NOT a ‘get rich’ plan by any stretch, but we are avid do-it-yourselfers and enjoy the physical aspect of the work….the last house we did we contracted out the new shingles, exterior painting(due to time constraints) and the hardwood floor refinishing, but installed a new kitchen, bath, all new doors and trim, lighting,etc. as well did all the interior painting, etc. ourselves. Our ‘take’ after all was said and done was about $10,000(for about 3 months of on-the-side work.) The most we have cleared on a project is $15K…on one, we had to carry it almost a full year (it was a seasonal cabin) and ended up with a profit of about $750!! (We were grateful to be out of it without losing our shirts at that point!)

It is a job for the most part like anything else, but carries the potential for greater gains and losses…as FT indicated you absolutely have to buy right–the fabulous work you do is irrelevant if you over pay at the front end.

(and in response to the Q. re: capital gains…you do have to pay tax on 50% of the capital gain….so with a $10k profit for example you have to claim a $5K capital gain and pay tax at your rate on that portion. However if you were clever enough to lose money when the market crashed last fall, you could use those capital losses to recoup all the taxes you’ve paid in gains over the past 3 years!!:)

Flipping houses for profits is one of the schemes that is at the root of the current economic malaise. Too many people got involved, because it was a sure thing. “You can’t lose with real estate.” – I think investing in real estate is as viable an investment option as any other. If you want to be successful, you got to do your homework. A “good nose” also helps.

Maybe it’s true in the states, but I can’t think of any neighbourhoods around here where a place with good bones and in need of cosmetic upgrades would go for $140K, and after renos would sell for 43% more.

What’s more, I wouldn’t consider this unless my profit was commensurate with my time put in. Sure 15K profit would be nice, but if it took you 4 months and worked evenings and some weekends on it, that might only work out to $30/hr. Personally, my spare time is worth more to me than that.

I agree with #1 & #8 — too many people doing this over the last decade were depending on price appreciation to bail them out if they miscalculated, and the perception that it’s a sure fire thing has trimmed the margins; there isn’t enough of a safety factor/margin of error.

One last thing to consider is what happens if it all goes pear-shaped. What’s the backup plan? Can you turn your flip into your primary residence and be happy there? Can you rent it out at a profit?

-OREA has three phases/courses to get the license, then you are forced into taking a fourth course and annual courses to maintain your license. The first two are either self study or classroom and are open book. The latter two are week long classes. I did them while going to law school so they were mainly just review for me so I did not put in much time into studying.

-The items I think are worth it are the textbooks you get when entering the first course. They give out the preprinted contract clauses that are what salespeople should use (lawyer approved, court tested). They are what I put into my offers. The book also has other forms that should be used but I find rarely are (such as the SPIS sheet).

-Unfortunatly from what I observed and the salespeople I’ve dealt with, the guide isn’t followed and “standard practice” is more relied upon. Unfortunatly when “standard practice” goes sidewise, its the buyer/seller who get hurt and not the salesperson.

-As an example: OREA form used, with schedules A,B attached. Sch B is a vender-takeback mortgage. The face of the offer has standard wording including Sch A but Sch B needs to be written in. It’s omitted, either on purpose or by accident, and Sch B is not registered on title. The vender is then out that money and has to sue to try and get it back (which generally isn’t worth it economically). The salespeople generally aren’t affected, and make full commission.

-Overall I took the course to find out what salespeople were being taught because I work as a lawyer and was planning on making it part of my practice (aka know your enemy). There is some economic benefit of having the license and I plan on getting them when work dies down. Anyways that’s my $0.02 (and not legal advice to be relied upon)

I think the value in getting your Real Estate License also depends on which province in which you reside. Here in BC the initial course is about $800, and you can add on another $200 to write the exam (this depends on your timing and where you live.)

Once you have passed the initial exam, there is another 5 day mandatory course ($250 + hotel, food etc). Tack on all your entry fees to the 3 different boards you will be associated with, and your errors and omissions insurance, and you will have another bill for about $1500, and you haven’t even got a business card yet.

By the time you finish paying for your mandatory Professional Development Courses, Relicensing Education Courses, and your monthly dues (about $100/month where we are) to your different associations, getting your license in this province to try and save a few dollars is a risky venture and not likely a good idea for anyone other than an extremely savvy flipper!

My family had our house remodeled and it was a tedious process. At firs the thought was fun and exciting, but during the renovation it was a mess. Now 2 years later – it was worth it for us. Something for the whole family to be proud of :)

Anyway, I think if you’re flipping a house for profit. You have to analyze to see if it is worth it. Location is the key, if the house is in a great location then a fixer upper is recommended. If the house isn’t in a good location and you just want to make a profit – I’d say leave it alone. For the most part it’s only worth it if you intend to live in the house. :)

I’ve never personally taken on a house flipping project, but it is something I have always wanted to try, personally I think it’s slowly becoming a fad because we see how easy it looks on TV shows. What I wonder is, when it comes to professionals what are their % of Loss vs Gain.

Cacp – Sounds like you need to find a new broker to work for. The broker shouldn;t be taking 25% of the total commission on each side, it should be 25% of the commission from their agent. Instead of 1.5% you get 2.25% which is pretty significant over the course of a year.

My friend is an agent and his broker takes 20% of what he makes, and every cent over $100k for the year is only taken at 5%.

Cacp – Sounds like you need to find a new broker to work for. The broker shouldn;t be taking 25% of the total commission on each side, it should be 25% of the commission from their agent. Instead of 1.5% you get 2.25% which is pretty significant over the course of a year.

My friend is an agent and his broker takes 20% of what he makes, and every cent over $100k total commissions for the year is only taken at 5%.

Unless the market is hot hot hot, I would caution getting into this area unless you are very skilled as a tradesman. Many a flipper have lost their shirts on unexpected problems uncovered during renovations.

That said, the following website may have some relevant free spreadsheets for some of you considering flipping or rental properties.

I’ve once found myself glued to the TV watching a Flip That House marathon. I was amazed at how many people landed upside down instead of making the huge profits they just knew would be theirs!
I second the posts that speak to a requirement to be passionate about home remodeling foremost and seeking profit as an added benefit. That type of mentality would likely make the entire project run much more smoothly. IDK, I can’t imagine all that work for a $750 profit. Then again I’m not that passionate about houses.

well really a nice piece of information. thanks for posting it… but i have the same question as raised by the frugal trader that do anyone knows the percentage charge for the land transfer tax in Ohio.

Agreed with #21. As an electrician who could probably handle 90% of the interior renos myself, but would need help for exterior renos due to lack of experience. I’d much rather come home from work, click on CNBC, and go to my Scottstrade account to see how I’m doing. Being fairly diversified I have about 10 grand set aside at all times that I “play” with on penny and other high risk stocks I move in and out of. I have made profits in 2 days that above posters have made after 3 months not including swear factor.

Just my thoughts. I still know a few guys at work who have done rather well flipping homes in higher end Long Island NY areas. Most still say it’s very nerve racking and a fairly long process to finally see the CASH. Where as a few clicks of the mouse and I can secure gains..OR loses LOL in nanoseconds. Less stress IMO. If you are passionate about homes and renos go for it. I work with my tools 40+ hrs a week so sitting at a PC 1 hour a day and doing a little DD afterwards seems easier for me to secure gains.

in order for flipping to work the market either has to be in a phase of irrational apreciation on the property has to be purchased at a discount. A discount to the price plus repairs which is the hardest discounts to find.

well from the description about the flipping of houses i can say that this is a job that is not for me as i am bad at buying and selling property but i liked you formula for evaluating the market price… informative post :)

I’d really like to hear some experiences from a 1 a year live in home flipper, it seems like the least risky way of doing it, worst case scenario your paying down the mortgage until the market will pay what you feel it’s worth. Obviously not practical for a lot of people (families) but I’m sure there are plenty out there doing this.

I’d also like to hear more about cabin/lake lot real estate investing because around here (Alberta) it seems the price difference between a empty lake lot and a lot with a cabin on it leaves room for some decent profits.

Becareful about the canadian taxation of flipping … it could be considered a venture in business with a view to profit .. any profit would be taxed 100% and if there was a loss .. well good luck saying how it should be 100% deductible if anything it would be a capital loss deductible at 50% against other cap gains …

Luckily I don’t know if CRA has caught on to auditing this type of business activity to get more tax revenues but who knows in the future .. all land transfers have to be registered …

In virtually every single property you flip, you will run across SOMETHING that you simply didn’t expect. Whether it’s an issue that pops up 2 hours before closing that needs to be handled or a big surprise when you peek behind the drywall that you had to replace! You’ll almost always run at least a little over budget or hold it a little longer than you anticipated.

Great article. One extremely useful and powerful tool that flippers can use (and that I use for my business) for finding comparables is Realquest. Though you have to pay a monthly fee, this will give you the most up-to-date data pulled straight from the county records. You can track everything from the after repair value to the square footage of a property. This is especially helpful if you plan on flipping houses outside of your local area as well.

The more I read through the posts on this blog the more I wish I would have found it eons ago :)

We tried the “flip a house” thing 2 years ago in the booming Edmonton market. It was the most work I’ve EVER done in my life, *and* we must have done it all wrong because the profit wasn’t what we expected. I think the market was just to volatile at the time. We didn’t lose money but it wasn’t pie in the sky like we’d heard it would be.

If you really want the best deals in investment properties, you have to increase your odds by finding more deals. Who is more likely to get a cheap apartment building, an investor that looks through the MLS listings and calls it a day, or the one that uses ten resources?

My wife and I bought our house in Toronto on spring 2006, not at all intending to flip it. I have always been reasonably handy, so we opted for a home we thought we could improve upon over time. We estimated that we would be in this house at least 5 years. Over the following two years, we were constantly under construction it seemed…
big deck in the yard, opened up walls, refinished floors, torn out carpet on stairs and refinished, finished basement, moved around laundry facilites, replaced all baseboards and door and window casings, landscaping, painted and decorated, etc, etc, etc. This list certainly kept me busy for a long time, as the only thing I didn’t do myself was the refinishing the floors…

In the end, when we decided to move our of Toronto, we put scrambled to finish everything on time to put the house on the market after exactly 2 years. The house sold in 4 hours, for about 105K more than our initial purchase price. A nice little profit, but here are my final thoughts…

Pros –
profits
sense of accomplishment
I enjoyed doing most of the work, but stress to get things finished got to me in the end.

Cons –
living ina construction zone with a new born baby…
leaving the house after having done all that work…

In the end, we bought a lovely house out of town, and I havent picked up a tool since. although I am starting to jones for a project of some sort, I think i will pick up a rental that I can do alittle work on…

Great Post and one that I’ve been interested in for some time. While I enjoy the physical aspects of DIY, it can get old real quick. I’ve managed to satisfy this crave by fixing up my own home with hopes of one day selling it for alot more than I bought it for. But even then, you’d have to get total buy in from all family members as the dust and mess that comes with remodeling can really stress people out. For the passive investor (one having a concurrent job), it’s really difficult because the only time for one to search for properties is during the weekend. Again, don’t think that you’re the only one that knows about this scheme. There are many out there doing this full time and for a guy like me who likes his day job, it’s almost impossible to find deals and complete a flip in a timely manner..unless of course if you’re already a tradesman with many contacts in the building trades that you could ‘sub’ out.

I think the problems here arise from the fact that people just don’t research stuff enough before jumping in. There are several parameters to consider.
Its best if its your main residence. You need a place to stay. If it doesn’t sell next week, no problem. Zero taxation as your primary residence. You need to be able to segregate your living. When there is work being done in one area of the house you don’t go to that area unless you’re working there. It takes flexibility. Living with spoiled people that have to have things “their way” won’t work.

Advantages: Zero tax, no commute time to work, the ability to hire cheap grunt labor for the monotonous stuff. The ability to buy demolition materials when available for pennies on the dollar. If you have a flexible schedule and a loan officer isn’t breathing down your back you can buy what you want when you want. Its about freedom really.

If everyone did this and had basic skills learned in school so they could quickly know an accurate appraisal of a property because of the work involved, the economy would be in a far different state. Imagine if most people were mortgage free by 30.

I find that yes, you can make way more money using other people’s money. But in many ways its cursed money. You don’t have the same satisfaction than if you started smaller and used your own. Its like planting a seed and watching it grow. Using other people’s money is like hiring someone to care and water the plant every day and not seeing the growth until its mostly finished. I just find that people that use their own money seem to enjoy their investments much more. And that’s important. If you’re not enjoying your investments, what are you doing it for? Just the money? That’s shallow and rather unfulfilling. The people that have fun with their money – these are the real financial geniuses.

Noise: If one can do most of the loud stuff together or group as much as possible together this helps greatly with your own family and the neighbors. Or send them away on vacation during the loud times! Noise is hard to live with. You can avoid dust and dirt by being physically away but noise kind of travels…lol.

I started flipping houses in August 2011with a partner. We don’t do any work other than finding the properties. We pretty much follow the same plan as noted in that book. We sold our first house at the end of October privately for a grand profit of $3000.00. Our second house we sold in Feb 2012 for a $24000 profit. We are working on the third house and are two weeks away from completion. We just found out the furnace had to be replaced which wasn’t in budget. We purchased are fourth house and took possession today. The biggest problem to date is finding houses fast enough for our renovator and holding three houses at once.